Surface Transforms

The large growth is now self-financing

06 Oct 2022 / Corporate research

SCE is raising equity: £16m through a successful placing at 40p and up to £3m via an Open Offer. This will fund the completion of Factory One and most of Factory Two, with positive operating cashflow then doing the rest. With capital now in place, internal cashflow would fully fund, year-in/year-out, 30%-plus annual growth. This is a very fast-growing market. An extra order is expected this year. With an order book twice the market capitalisation and a prospective further book twice that again, the fundraise is clearly designed to bring to fruition those pending orders, now that the OEMs are assured of significantly growing fulfilment capacity.

  • Order book quadruples in under two years: The most recent win is a new customer, OEM 9. Three OEMs generate 2023E revenue, and five 2024E. SCE has announced that a new contract should be won within weeks. End-sales of these car models have waiting lists themselves, which adds visibility too.
  • Looking like VR take-off velocity: VR is the rotate velocity for a take-off. This, we believe, has just happened. The fundraise is an operational accelerant, because it gives OEMs certainty of delivery, with Factory Two build starting. Further, we upgraded our operational numbers for 2023 only last month.
  • Good 1H’22, profits 2H’22E: The recent results, announced on 5 September, covered a period where production ramp-up was impressive, fully proving the operational model. When many businesses have seen gross margins fall, SCE has not. Year-in/year-out, it shares cost efficiencies with clients, facilitating further growth.
  • Risks: Sales increases lead to a definable rise in working capital needs. New capacity has now been successfully commissioned, but is always a risk. Some capex is in US$, which is all hedged. Gas is a noticeable input, and our numbers assume high prices, which SCE is countering through major efficiency gains.
  • Fundraise and investment case: The £16m raise is confirmed, and, post this, SCE will be able to fully and organically fund the rapid expansion of its 10% market share in a rapidly growing global market. This obviously is attractive to the OEMs in its £400m book of “pipeline” orders. The fundraise should be a trigger to a major order book acceleration. A £3m Open Offer (1 for 26) is under way.
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